The giant corrugated white shed that dominates the quayside at Vlissingen in the Netherlands is just one of many dull metal boxes like it, dotted around the harbour city.
Inside the vast hangar, shimmering under the fluorescent bulbs, are row after row of neatly stacked aluminum ingots.
Mundane as they look, these huge storage sheds are behind a fierce row that has battered the reputations of Wall Street and industrial titans including Goldman Sachs, Glencore and JP Morgan Chase.
The row has also reverberated through the City of London, sparking a revamp of the London Metal Exchange’s (LME) rules that govern its controversial metals warehousing system.
The LME has been under pressure since last year’s investigation by a US Senate committee into the aluminium market that issued a damning report in November.
Big industrial users of aluminium, such as Coca-Cola, MillerCoors and Rexam, the packaging giant, claim that a cadre of Wall Street banks, traders and producers of the metal have sucked as much as $6bn (£4bn) a year from them by artificially inflating the price.
“The market is effectively broken,” said one industrial user of the metal. “Since 2009, the physical delivery system has broken down.” The price paid on top of the base price for physical delivery in Europe – the premium – has rocketed since 2010, the source noted. That was the year Goldman Sachs and Glencore, the £37bn mining and trading conglomerate, snapped up warehousing companies, a move that coincided with a sharp rise in the amount of metal being shoved into these sheds.
But the length of time it takes users to get their metal out of storage has also rocketed, pushing up the premium.
The premium peaked at $425 a ton in November, although it has fallen recently to about $305, after the LME’s long overdue intervention.
A fall in the premium is a move in the right direction for users, but they believe a lot more can be done; they think it would be closer to $180 a ton if the market was functioning efficiently.
The metals market has been a hotbed of action recently, with price slumps and frequent takeover rumours. While copper rebounded from five-year lows in January, the price of iron ore has tumbled to less than a third of the value it commanded at the peak of the boom in 2011. The top three producers – BHP Billiton, Rio Tinto and Vale – have flooded the market with ore to drive other high-cost rivals out of business.
Compared with these assets, aluminium has remained relatively stable. However, large users of the metal believe that by hoarding aluminium in two LME storage locations – Detroit and Vlissingen – the owners of these warehouses, mainly Goldman Sachs and Glencore, have been able to inflate the “all-in” price.
One component, the base price, is quoted on the LME and shaped by global supply and demand; but the other component, the delivery premium, has rocketed over the past five years as the queues for metal stored in Detroit and Vlissingen lengthened.
According to LME rules, warehouse owners are obliged to load out a minimum of 3,000 tonnes of metal a day from each warehouse location. But the storage companies treat this as a maximum, slowing down the outflow of metal and helping maintain long queues.
Getting your metal out of Vlissingen warehouses means joining a queue for nearly two years – 586 days, to be precise. In Detroit it is worse, taking 610 days to deliver aluminium from the warehouse.
One company – Metro International – dominates the storage units in Detroit. Until December, Goldman Sachs owned Metro. In Vlissingen it is a company owned by Glencore, Pacorini, that has a similarly tight grip on the LME supervised warehouses.
Goldman and Glencore snapped up these businesses in 2010, at which time the queues to get metal from the sheds began to rise.
Last year’s Senate committee report noted that Goldman Sachs built up its physical aluminium stockpile from less than $100m in 2009 to more than $3bn in 2012. Its warehouses also controlled 85% of the LME storage business in the US in 2014.
The heightened scrutiny of Wall Street’s ownership of commodities assets has sparked a sale of these businesses. Goldman sold Metro to Reuben Brothers, the Swiss private equity group, in December for an undisclosed sum.
In October, JP Morgan Chase raised $800m from the sale of its commodities arm to Mercuria. The sale included Henry Bath, another of the big players in metals warehousing.
Goldman, Glencore and other Wall Street banks involved in the aluminium market have always denied any wrongdoing.
Jacques Gabillon, head of Goldman Sachs Global Commodities Principal Investment Group, told the Senate committee: “The length of the queue to remove metal from Metro’s Detroit warehouse is not the result of action by either Goldman Sachs or Metro. Queues really started to build up in 2012 – two years after Goldman Sachs’ purchase of Metro.”
Another aluminium industry source noted that since 2008 the price has fallen from around $3,000 a tonne, plus a $100 premium, to $1,800, plus a $300-$400 premium.
Despite the fall in the overall price, big aluminium consumers want the LME to act more quickly to sort out the complex warehousing issue.
The LME responded last month with a rule change that will slowly unwind the huge queues at Detroit and Vlissingen.
It seeks to link the quantities of aluminium loaded into the LME’s warehouse system with those that are loaded out. The minimum load-out will remain at 3,000 tonnes a day, but if companies load more in during one quarter, they will have to load-out the equivalent tonnage in the following three months.
It has also just closed a consultation on plans to ban warehouses paying incentives to producers to keep their sheds fully stocked.
“The change will eventually reduce the queue time from almost two years to about 50 days, but it will take two years for that to happen,” a user said. “That’s another $12bn [through an inflated premium] that will be redirected from consumers to producers.”
The LME said it would continue to work with the market to “prevent new queues accumulating in the future”.
Sources from the aluminium industry dismissed users’ claims, saying large consumers don’t even buy metal from the warehouse because they deal directly with big producers, such as Alcoa, Rio Tinto/Alcan or Rusal.
One said: “The users that complain the most don’t even use the product that comes out of the warehouse. Coors needs sheet [aluminium] not ingot [the main product stored in warehouses].
“The market had begun to rebalance itself; premiums are stabilising, and inventories are coming down. It is just a matter of weeks before this all blows over.”
The source admitted the LME’s distribution system had created a distortion to the all-in price of aluminium, but said it was already happening when it was spotted by eagle-eyed Wall Street bankers.
In 2009, the market was flooded with aluminium after the credit crunch as demand fell by 20%, or 5m tons. Despite the slump in demand, production eased by only 2m tons, leaving 3m tons without a home. This excess metal was shoved into the LME’s storage system to help producers keep their smelters running.
At the time, hedge funds and other financial speculators could borrow at low interest rates, store the metal and sell a futures contract for later delivery at higher prices.
The money-making scheme soon caused depots to soon fill up. When the global economy improved in 2010, appetite for the metal returned and the queues to get it out of storage began to stretch.
The industry source observed: “The situation got distorted but that doesn’t mean it was abused. The premium went up but the reversal will happen and you are seeing that now.
“A lot of smart guys realised there was an anomaly. When chaos happens, very smart guys make money. That’s what happens.”